Titling Our Investment Decision: Coca-Cola versus Procter & Gamble - Choosing the Superior Dow Dividend King Stock for Year-End
Investors searching for trustworthy dividend-paying companies often consider factors such as the company's dividend history, market dominance, business growth potential, and dividend yield. Only four divinity champions reside within the prestigious Dow Jones Industrial Average: Johnson & Johnson, Walmart, Coca-Cola (KO 1.43%), and Procter & Gamble (PG 0.50%). Their consistent dividend performance earns them the title of Dividend Kings.
Although J&J stock slightly rose by 11.1%, Walmart surged by 78% year to date, Coca-Cola and Procter & Gamble yield steady returns for investors, offering attractive yields in the process. In this analysis, we focus on these two Dow Dividend Kings to determine which is the superior investment opportunity before year's end.
Capital return masterclass
Offering a decent 2.3% yield, Procter & Gamble (P&G) distinguishes itself through its long-term dedication to rewarding shareholders with both dividends and share buybacks.
Over the last decade, P&G has generously returned a staggering $147.8 billion to shareholders, with $79.9 billion distributed as dividends and $67.9 billion through buybacks. If P&G had not repurchased such a substantial amount of its stock, it could have boasted a yield as high as 4%. Share buybacks have contributed to accelerated earnings-per-share growth, as they drain the share count and grant stockholders more significant portions of income indirectly.
P&G's success lies in operating iconic brands in various essential consumer staple categories, such as baby care, feminine products, housekeeping, grooming, oral care, skincare, personal healthcare, and cleaning products. This broad market presence allows P&G to skirt administrative inefficiencies and avoid wasting capital on unsuccessful marketing initiatives.
Instead, P&G capitalizes on its scale, providing one of the most efficient supply chain and distribution networks within the industry. Combined with P&G's pricing power, these advantages enable the company to boast high operating margins substantially exceeding those of many competitors. The elevated operating margins empower P&G to successfully implement substantial capital return programs.
In short, P&G's operational efficiency, pricing power, and smart capital allocation enable it to offer a compelling and long-term dividend and share buyback program, making it an attractive option for risk-averse investors seeking passive income.
However, P&G's sales volume growth has slowed down. Relying primarily on price increases and buybacks to boost earnings rather than expanding sales volume, P&G has managed to navigate this challenging environment but may soon confront a plateau in how much it can increase prices without encountering negative volume growth. Most recently, P&G recorded negative volume growth in three of five segments and flat overall volume.
Coke's lower valuation and superior yield offer an edge
Coca-Cola shares similar sales volume challenges with P&G. However, Coke's pricing power is less potent than P&G's, and its share buyback program lacks consistency. Nonetheless, Coke anticipates 10% to 12% diluted earnings-per-share (EPS) growth in the upcoming fiscal year, while P&G may struggle to achieve double-digit EPS growth if volume growth slows further.
To address volume declines, Coke invests in its core brands and emerging market opportunities, including popular brands like Topo Chico. Coke's proven strength in marketing and brand development enables the company to navigate near-term challenges and recover lost volume without resorting to excessive price cuts.
In comparison to P&G, Coke boasts a much higher operating margin, thanks to its bottling partnerships and operational efficiency. In fact, Coke's operating margin surpasses that of both PepsiCo and Monster Beverage, and only slightly trails Apple's.
Some investors might argue that P&G is the more robust business due to its superior earnings growth and strong pricing power. However, Coke easily outshines P&G in the area of valuation.
Coke and P&G share similar historical median price-to-earnings (P/E) ratios. However, Coke's P/E ratio rests below its average, whereas P&G's ratio hovers above the average. What's more, P&G's forward P/E ratio is relatively close to its average, while Coke's is only 22.3, suggesting that P&G may need to grow into its valuation, while Coke could become more undervalued if its stock price remains steady.
In addition to a better valuation, Coke offers a significant 3.1% dividend yield, higher than P&G's 2.3% yield.
A case for Coke
Coca-Cola emerges as the superior investment choice due to its more attractive valuation and higher yield. Both companies face hurdles due to strained consumer spending and the limits of years of price hikes. While P&G has navigated these challenges more successfully, it continues to experience negative volume growth across most segments.
Investors seeking predictable passive income might consider purchasing shares in both companies. However, if forced to choose between the two, Coke is the more enticing option, especially as inflation continues to impact consumer spending habits and product prices.
Furthermore, given Coca-Cola's strategic investments in emerging market opportunities and its robust brand portfolio, the company appears poised to maintain and potentially increase its dividend payouts in the future. In the realm of finance and investing, the higher yield and lower valuation of Coca-Cola make it an appealing option for investors seeking income and growth potential.
Additionally, Coca-Cola's strong operating margin, backed by its bottling partnerships and operational efficiency, demonstrates its financial resilience and ability to generate profitable growth even in challenging economic conditions. This financial strength, coupled with its lower valuation and higher dividend yield, highlights Coca-Cola as a potentially superior investment compared to Procter & Gamble.
